Wells Fargo Asset Management is in the market for a fund of hedge funds business with assets under management of up to $12bn.

Chief executive Mike Niedermeyer said: “We are keen to provide advice on alternatives allocation. It is the thing our clients request most often.”

He said he would look at businesses with as little as $5bn under management.

Wells Fargo is best known for its traditional equity and bond funds. Niedermeyer said he preferred to access skill in hedge fund selection and allocation, rather than invest directly in managers.

The hedge fund industry faces a number of headwinds, with assets managed in the eurozone set to drop by an eighth over the next four years, according to Ernst & Young.

Niedermeyer said he expected charges to drop in the sector, including a fall in fund of hedge fund performance fees. Don Steinbrugge, managing partner of hedge fund marketer Agecroft Partners, believes that pension schemes are set to invest more in hedge funds. But he agreed that manager fees were coming under pressure.

He said investors would back funds with good reputations: “Performance is of secondary consideration to perceived safety and a reduction of headline risk.”

Damien Loveday, global head of hedge funds at consultant Towers Watson, said: “Investors think fees are way too high, and they are talking about it more than ever before.” He added that costs were going up because of regulation and prime broking charges.

Jim McCaughan, chief executive of Principal Global Investments, told Financial News he wanted to buy a fund of hedge funds last April, although he has yet to confirm a deal.

One investment banker said: “Wells Fargo and Principal have been looking for a bit. But they’ve got some competition. US buyers don’t have the same hang-ups with the sector as the Europeans.”

One analyst said she expected Franklin to use K2 to offer strategy advice to clients: “People will want to use the ’40 Act legislation [1940 Investment Company Act], which can offer retail investors a wrapper similar to Europe’s Ucits.”